1. Field of the Invention
The present invention relates to the field of asset valuation, and in particular to the field of valuing patent assets or other tangible or intangible assets subject to a periodic tax or renewal fee.
2. Description of the Related Art
Patents play an important role in our economy in encouraging private investment in new ideas and the development of new technologies that improve productivity and quality of life for everyone. Each year more than a quarter-million patent applications are filed in the United States Patent and Trademark Office (“PTO”), resulting in the issuance of over a hundred fifty-thousand patents annually. Patent owners and applicants pay combined fees and costs of over a billion dollars per year to the PTO to obtain and maintain their patents and applications. See, United States Patent & Trademark Office, FY 2000 USPTO Annual Report. Additional fees and costs are typically incurred for related professional services, such as attorneys fees, search fees, drafting charges and the like.
A recent survey conducted by the American Intellectual Property Law Association (“AIPLA”) reported that the median fees charged by law firms for preparing and filing original utility patent applications in 1999 ranged between $4,008 and $7,993, depending upon subject matter and complexity. See, American Intellectual Property Law Association, Report of Economic Survey, pp. 63-63 (1999). In addition, patent owners bring thousands of infringement suits each year in the federal courts. In the twelve months ended June 1998 a total of 1,996 patent-related cases were filed in the United States Federal District Courts. See, Annual Report of Judicial Statistics for 1997, Vol. 1, Civil Cases. The median cost of these suits in 1999 was estimated at $1.5 million per side through trial and appeal. It can be conservatively estimated that the total aggregate costs for obtaining, maintaining and enforcing patents in 1999 exceeded about $5.5 billion.
Because of the great importance of patents in the both the U.S. and global economies there has been continued interest in quantifying the value of patents and their contribution to economic prosperity of the individuals or companies that hold and/or control them. Such information can be useful for a variety of purposes. For example, patent holders themselves may be interested in using such information to help guide future decision-making or for purposes of tax treatment, transfer pricing or settlement of patent license disputes. Financial advisors and investors may seek to use such information for purposes of comparative value analysis and/or to construct measures of the “fundamental value” of publicly traded companies for purposes of evaluating possible strategic acquisitions or as a guide to investment. Economists may seek to use patent valuations for purposes of economic forecasting and planning. Insurance carriers may use such valuations to set insurance policy premiums and the like for insuring intangible assets. See, for example, U.S. Pat. No. 6,018,714, which is hereby incorporated herein by reference.
However, accurate valuing of patents and other intangible intellectual property assets is a highly difficult task requiring an understanding of a broad range of legal, technical and accounting disciplines. Intellectual property assets are rarely traded in open financial markets or sold at auction. They are intangible assets that secure unique benefits to the individuals or companies that hold them and/or exploit the underlying products or technology embodying the intellectual property. In the case of patent assets, for example, this unique value may manifest itself in higher profit margins for patented products, increased market power and/or enhanced image or reputation in the industry and/or among consumers or investors. These and other characteristics of intellectual property assets make such assets extremely difficult to value.
Patents derive unique value from the legal rights they secure, namely the right to exclude competition in the patented technology. This value (if any) usually manifests itself as a net increase in operating revenues resulting from either: (i) premium pricing of patented products or services; or (ii) royalty payments or other valuable consideration paid by competitors or other parties for use of the patented technology. Given these two inputs and the timing and probability of anticipated future revenue streams, an experienced valuation professional can readily estimate the value of a patent. See, Smith & Par, Valuation of Intellectual Property and Intangible Assets, 2nd Ed. (1989).
A familiar scenario is a patent licensed to a third party under an exclusive agreement that guarantees a predetermined income stream over a certain period of time. Using an income valuation approach, the intrinsic value of the licensed patent can be calculated simply as the net discounted present value of the future projected cash flows. Similarly, if the patent owner is exploiting the patented technology itself, the value of the patent may be fairly estimated as the net discounted present value of the incremental profit stream (assuming one can be identified) attributable to the patent over the remaining life of the patent or the economic life of the patented technology, whichever is shorter.
In these and similar scenarios where specific anticipated economic benefits can be identified and attributed to a particular intellectual property asset, accurate and credible estimations of value can be calculated using a traditional income valuation approach. In many cases, however, it is exceedingly difficult to identify with a desired degree of certainty a definite income stream or other anticipated economic benefit attributable to a particular intellectual property asset of interest. The classic example is a newly issued patent or an existing patent covering technology that, for whatever reason, has yet to be commercialized. In these and similar cases involving “unproven” patent assets the income valuation approach is less useful. The more tenuous the connection is between current revenues and anticipated future revenues, the more speculative the income valuation approach becomes.
For example, one popular approach involves guestimating “hypothetical” future license fees or royalties based on available data obtained from private license agreements and/or litigation settlements/awards involving patents in a similar technical field. While such analysis may be useful in certain cases, it suffers from several drawbacks that can lead to significant inaccuracies. One drawback is the inherent selection bias in the comparative data used to calculate hypothetical future license fees or royalties. By definition, all of the patents in the comparison group have been licensed, litigated and/or otherwise commercialized. This creates a “high-value” selection bias because most patents within the general population of patents are never licensed, litigated or commercialized at all. Thus, the approach will tend to over-value many patent assets. The approach also does not attempt to distinguish between similar patents based on underlying quality, breadth of claims, etc. Rather, the approach assumes that patents are fungible assets and that any one patent has essentially the same income earning potential as any other patent within the same field.
The reality is that every patent is unique. There are good patents and bad patents; broad patents and narrow patents; patents that are well-drafted and prosecuted and others that are not so well-drafted or prosecuted. Two patents in the same industry and relating to the same general subject matter can command drastically different royalty rates in a free market (or damage awards in litigation) depending upon subtle differences that affect the comparative breadth and defensibility of each patent.
Where there is enough money at stake, one or more patent lawyers can be engaged to analyze an individual patent and render a legal opinion, including an assessment of overall patent quality. But, such qualitative assessments are difficult to quantify in a way that lends itself to patent valuation analysis. Legal opinions are also inherently subjective, leaving the possibility for inconsistencies in assessed patent quality from attorney to attorney or from firm to firm.
What is needed is a purely objective approach for comparatively rating and valuing patents (particularly unproven patent assets) in a way that overcomes the above-noted problems and limitations.